How the Student Loan Debt Crisis Drags Down Home Prices

Pity the college graduate, burdened with shocking levels of student-loan debt and looking for a job in the worst employment market in two decades. But save a little pity for the rest of us. The staggering amount of outstanding student debt -- nearly $1 trillion owed -- is beginning to impede the U.S. economy as a whole, a new report from the New York Federal Reserve suggests. That's happening chiefly by robbing the housing market of its richest crop of new buyers: young college graduates.

The statistics in the report are dismaying in themselves. With the number of borrowers approaching 40 million nationally, including more than 40 percent of 25-year-olds, the average balance on their loans has risen to $25,000. About 6.7 million of all student borrowers, or 17 percent, are delinquent on their payments three months or more.

"Delinquent student loan borrowers have a very difficult time accessing credit, and the share of those borrowers is greater today than in the past," said Donghoon Lee, a senior economist for the New York Fed and one of the authors of the report. For the average homeowner, the worst news is that these over-leveraged and defaulting young borrowers no longer qualify for other kinds of loans -- particularly home loans. In 2005, nearly 9 percent of 25- to 30-year-olds with student debt were granted a mortgage. By late last year, that percentage, as an annual rate, was down to just above 4 percent.

The most precipitous drop was among those who owe $100,000 or more. New mortgages among these more deeply indebted borrowers have declined 10 percentage points, from above 16 percent in 2005 to a little more than 6 percent today. "These are the people you'd expect to buy big houses," said student loan expert Heather Jarvis. "They owe a lot because they have a lot of education. They have been through professional and graduate schools, but their payments are so significant, they have trouble getting a mortgage. They have mortgage-sized loans already."